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3 Top Turnaround Stocks

Go ahead, be contrarian -- just make sure you're right.

In the stock market, few things are more enjoyable than owning a stock on the cusp of its own massive turnaround. After all, many fortunes are made by the investors who succeed in buying great businesses:

During times of maximum pessimism.

While they're being ignored and forgotten.

When they're being beat down to bargain-basement levels.

Meet the turnaround tycoonsNotable investors who've followed this strategy include Warren Buffett, John Templeton, Seth Klarman, and many more.

We probably can't help you with your contrarian spirit, but we can offer you three possible turnaround ideas from our Motley Fool CAPS community. Despite being down 15% or more over the past three months, these stocks have received a four- or five-star rating (out of five) from our pool of individual and professional investors. Our candidates today:

Company

3-Month Return

Industry

Current CAPS Rating(out of 5)

Arcos Dorados(NYSE: ARCO)

(32.5%)

Restaurants

*****

ArcelorMittal(NYSE: MT)

(27.9%)

Steel and iron

*****

Cisco Systems(Nasdaq: CSCO)

(17.0%)

Networking and communication devices

*****

Sources: Motley Fool CAPS.

These stocks have been slammed for very specific reasons, so don't view them as formal picks -- just ideas you might want to investigate further. With that said, let's see exactly why some of our CAPS members believe they're good bets to bounce back.

Golden opportunityWith its shares down more than 30% over the past three months, Arcos Dorados -- Latin America's largest McDonald's(NYSE: MCD) franchisee -- tops this week's list of losers. Rising costs, higher taxes, and foreign exchange losses have weighed on earnings recently, but the company's consistent double-digit same-store sales growth is, by far, a better indicator of its long-term prospects. While McDonald's might be too slow, stodgy, and even risky given its European exposure for many Fools, Arcos Dorados seems like a cheap higher-growth alternative worth chewing on.

Seems oversold at these levels. Micky D's is growing fast in [Latin America], with great [same-store sales] growth. I see no reason for this not to continue. In the short term, commodities, [foreign exchange rates] and taxes will screw with results. Long term, should be a winner. Buy.

Steal of a steelSteel stocks continue to be pressured by the weak global operating environment and fears over a slowdown in China, but Luxembourg-based ArcelorMittal has been receiving extra punishment of late: Thanks in large part to its European exposure, the stock trades at a clear book value and forward P/E discount to U.S. counterparts U.S. Steel and Nucor. Of course, given Arcelor's scale advantages and the fact that CFO Aditya Mittal noted last week that he is "not seeing a crisis-like environment occurring" in Europe, I'd expect that valuation gap to slowly close.

The price to book is under 0.6. That's all that need be said. The market has grossly overreacted on the basic metals and on European stocks. This one gets hit on both accounts, even though it earns slightly more than half its EBITDA outside of Europe.

Bellwether bargainOur last turnaround candidate this week is networking behemoth Cisco Systems, whose shares plunged last week after a disappointing outlook exacerbated concerns over weak IT spending -- particularly in Europe. Unfortunately, the cautious guidance is consistent with that of other tech bellwethers like IBM and Intel(Nasdaq: INTC), which also warned about lower government and corporate spending recently, making a quick earnings recovery difficult. So why do Fools like it? At these depressed prices, Cisco's cash-rich balance sheet and continued dominance of its core markets -- routing and switching -- make it a long-term bet with very limited downside.

Cisco is no longer an innovator, but it does big business and still dominates the router market. It also has enough cash to buy innovation via takeovers. It's back to be priced for disaster, when in fact it's corporate overhaul is nearly complete. It's not going to light up the night sky, but Cisco can be a solid performer over the next few years.

Now, it's your turn(around)Turnarounds offer an exceptional way to wallop the market's overall returns. The catch, of course, is that they require a little more effort to figure them out.

But if you're crunched for time, we've compiled a special free report called "The Stocks Only the Smartest Investors Are Buying," which uncovers several other bargains that the value-master himself, Warren Buffett, thinks highly of. The report is 100% free, but it won't be around forever, so click here to access it now.